Life insurance: falling interest rates after ECB rate cut?

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Life policyholders benefited from successive rate hikes by the ECB in 2023. As the clock now ticks down, should they fear a collapse in their yields?

Is the Euro life insurance fund’s comeback already over? In 2023, after years of disappointing returns, guaranteed life insurance benefits have returned to life, with an average return of 2.60% – a level not reached since 2014 – and more than 4% for the best contracts. The reason for this return to grace? The several increases in key interest rates decided by the European Central Bank (ECB) to fight inflation.

The sharp rise in those rates – 10 consecutive hikes to raise the banks’ refinancing rate from 0% at the start of 2022 to 4.50% in September 2023 – has actually pushed up bond yields. Assets that make up 75% of euro funds and whose function is as follows: in return for a loan of money, the issuer of the bond (a government or a company) undertakes to pay regular interest (the “coupon”) to the lender (here the insurance company) for a certain period.

Hence savers’ legitimate fear of seeing the performance of their life insurance contracts deteriorate again, while on June 6th the ECB announced a first cut in its key interest rates since 2019. A cut which could be followed by others if the rise in prices were to slow down sustainably. Therefore, should life policyholders expect a return on performance of less than 2% this year?

The price drop is still limited

Let’s say it right away: the answer is no, and for several reasons. Firstly, this first interest rate cut is only 0.25 points: The refinancing rate – which the ECB lends to banks for – is e.g. gone from 4.50% to 4.25%. In other words, “this first drop won’t have a huge effect”confirms Amandine Lezy, Head of Life Insurance in the Corum Group. “Eurofunds as a whole will be able to continue to invest in pools at satisfactory rate levels compared to what insurers have endured for years when rates were close to zero”she continues.

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For example, the 10-year bond issued by the French government (10-year OAT) – and which insurance companies are happy with – currently shows a yield of 3.10%. As for corporate bonds, they yielded an average coupon of 3.37% in the second half of 2023, according to the Treasury. For its part, the average return on the portfolios of insurance companies was 2.60% in 2023: it therefore has every opportunity to continue to rise given the current interest rate on government and corporate bonds.

What’s more, while other rate cuts may occur this year, we see some “inertia” of the euro funds’ results: From one year to the next, the return does not experience large variations. And with good reason: the bonds that make up Eurofunds have an average lifespan of eight years, according to France Assureurs. “Insurance companies generally prefer to invest in long-term bonds because the money that their customers have deposited is also there for a long time (on average 12 years, editor’s note)”, explains Gilles Belloir, general manager of the online broker Placement-direct.fr. This “turnover” limited by the insurers’ bond portfolio explains the relative slowness of the increase in the average return of the euro life insurance fund – from 1.30% in 2020 to 2.60% in 2023 – compared to bond yields, the rate of the 10 years. At the same time, OAT has gone from 0% or even less to more than 3%.

The results of the Eurofunds are guaranteed by bonuses from several insurance companies

Finally, regardless of their Euro fund, certain insurers currently offer savers the guarantee of a certain level of performance on their contract. The Guarantee Mutual Fund, for example, is offering a 6% rate in 2024 for all payments made before July 15 to its Euro fund. At Abeille Assurance, the bonus is between 2% and 2.40% (depending on the share of units of account, non-guaranteed support) and will be added to the results of the Euro fund in 2024 and 2025. Operation “guaranteed prices” Or “increased prices” which therefore also gives you the opportunity to maintain the return on your savings without risk despite the drop in interest rates.